How to handle the losses in your portfolio

Does your portfolio’s current drawdown from its highs make you scared?

When you’re running a fund, you keep track of what’s called “The Drawdown,” which simply measures how far from your fund’s all-time high-water mark you are at any given time. If you have a lot of big “drawdowns” over time, it’s indicative that your portfolio is rather volatile. A lot of investors and fund managers don’t like to see volatility in the portfolio.

I’ve seen fund managers play all kinds of games with shorting options and hedging their positions to try to minimize volatility in their fund. I personally don’t think it’s wise to waste time measuring volatility, because I’ve owned stocks like Google and Apple and Facebook for the long-term as they have swung wildly over the years. But the profits in the portfolio over time is what I care most about. So much so that I don’t even care measure the volatility in my own personal portfolio anymore.

For most investors and fund managers though, volatility creates and equates to fear. When their stocks get crushed and their portfolios show a big drawdown they get scared. Right here right now, with many formerly highflying momentum stocks like Splunk, FireEye and others down 50%-75% or more in the last three months, the drawdowns for anybody with exposure to those kinds of stocks is big and ugly.

A few months ago when the highflying momentum stocks were up at all-time highs, but were just starting to show some signs of cracking I wrote:

“I don’t think the recent weakness in momentum stocks, biotechs and the markets in general, is indicative that the cycle has turned. More likely, I expect to see the bubble-blowing bull market recommence probably sometime this summer, after some continued near-term weakness in the markets finally creates some fear and some broad market panicky selling, and the bulls get worn down and start to run.”

We’re not quite to the summer yet, but the near-term weakness in the markets has the fear building and the bulls getting worn down.

All of which leads me to this question: Are you scared yet?

The bulls are definitely scared — and scarred, despite the broader indexes still being within a day’s move of new all-time highs. Think about that for a moment. The indexes’ own drawdowns are barely measurable from their recent all-time highs. Does that make you more scared or less? I’ll guarantee any fund manager reading this article who has to measure their performance against the indexes for their benchmark is gulping right now, scared to think of the recent underperformance they now need to make up. I’m glad I’m not a fund manager anymore.

With some of my biggest positions like Facebook and Google down from their recent all-time highs, countered with a Sandisk and Calgon Carbon and others that have been setting new all-time highs, my own portfolio would probably show about a 5%-10% drawdown from its all-time highs earlier this year. But I’m not going to measure it, because it actually doesn’t matter. I don’t ever expect that my stock portfolio will constantly be at all-time highs. I accept that I will continue to need to use a playbook that accounts for both ups and downs in the markets and in individual stocks that I own.

Before I go, I do want to know if you’re scared right now. I know I’ve been scared before and proclaimed being terrified back in the summer of 2008 on TV, right before the markets crashed. Sometimes, being scared is correct and should be acted upon. So, there you go: Are you scared right now and if so, are you acting upon that fear? Let me know in the comments below or come join our discussion on the topic right now on Scutify. We are constantly updating the Scutify apps with new features, and it’s the best stock market app out there. Click here to download the Scutify Android app or click here for the Scutify iPhone/iPad app.

PS. I wrote this five months ago: ” I think an NQ short paired up with a BIDU long might be a good mid-term to long-term way to play China tech.”

Cody Willard writes Revolution Investing for MarketWatch, posts the trades from his personal account at TradingWithCody.com, which is not affiliated with MarketWatch, and is the largest shareholder in Scutify‘s parent company, Wall Street All-Stars. At time of publication, Cody was net long Apple, Google and Facebook. Follow Cody on Twitter at twitter.com/codywillard.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.